The Supreme Court just closed the courthouse door on a legal strategy that activist investors have relied on for years. In a 6-3 decision handed down on June 11, the Court ruled that Section 47(b) of the Investment Company Act of 1940 does not create an implied private right of action, meaning private parties cannot sue to rescind contracts that allegedly violate the Act.
The case, FS Credit Opportunities Corp. v. Saba Capital Master Fund, Ltd., sounds like the kind of thing that would put most people to sleep. It shouldn’t. The ruling reshapes how disputes between fund managers and shareholders get resolved, and it tilts the playing field decisively toward fund operators.
What the case was actually about
Here’s the backstory. Saba Capital Master Fund, a well-known activist investor, challenged control share bylaws adopted by closed-end funds organized under Maryland law. Those bylaws limited the voting rights of any shareholder who accumulated more than 10% of a fund’s shares.
Saba argued this violated Section 18(i) of the Investment Company Act, which requires that shareholders be granted equal voting rights. The fund’s position was essentially: sure, maybe there’s a tension, but you can’t sue us over it in court.
